With an eye toward budget predictability and managing risk, more and more legal departments are looking for opportunities to implement alternative fee arrangements (AFAs) with outside counsel as an element of legal spend management.

While there was a time when any arrangement outside straight billable hours was uncommon, even unheard-of, a greater number of outside counsel firms are now open to AFAs. The issue, therefore, has become one of structuring the best fee arrangement for the situation: one that both parties will agree to, aligns to the goals and financial requirements of each, and is based upon accurate historical data that gives the legal department confidence that the arrangement is intelligent and appropriate.

Initial Considerations

There are numerous types of alternative fee arrangements being utilized these days, but before deciding which might be most suitable given the circumstances, it is wise to consider the engagement in terms of true value to the organization and the desired outcome. Is it a “win at all costs” matter or something much less critical in the big picture? Is compromise an option? Is any future relationship with the opposing party involved a non-issue, or does it involve an entity with whom you will need to continue to conduct business for many years to come? Both internal and outside counsel need to clearly understand the situation.

These factors can immediately help decide which is the best outside counsel firm to perform the work, if there had been any doubt. It can also lead to the legal department and outside attorneys then analyzing the situation upfront to seriously consider the best approach to achieve the desired goals in a cost-effective manner, beyond simply the appropriate level of staffing.

Establishing the Alternative Fee Arrangements

Trying to get work done for less money isn’t necessarily the sole — or even primary — reason behind opting for AFAs. The legal department may be looking for predictability and to simply keep costs from being open-ended, or there may be interest in allocating costs in a particular fashion, or to giving outside counsel reason to assume greater ownership regarding costs, or to divide the risk so that outside counsel assumes at least some of it. These are also considerations that can drive the decision regarding which type of arrangement is preferable.

In any case, having a foundation of relevant data upon which the pricing can be based is critical. In the best case, legal spend management technology can provide budgeting, performance and billing information compiled from previous engagements involving the same outside counsel and/or similar projects involving other firms. There’s no reason to go with a “gut feeling” when concrete data is available to guide you with specific measurements.

With that information providing insight, there’s much greater likelihood of arriving at a “win-win” fee structure — where both parties are not only agreeable but excited about the arrangement and won’t be second guessing the project as work progresses.

Many types of alternative fee arrangements can be successfully deployed between inside and outside counsel: fixed fees for the entire engagement; phased fees, with a fixed fee for each segment of a project; value-based fees, where an hourly fee is augmented by a sum to be based upon the favorable or unfavorable outcome of the matter; contingent fees, in which outside counsel is paid only if its work leads to a financial recovery (in which case it would receive a percentage of that full amount); or a blended hourly rate (for all timekeepers or by category).

But the key is ensuring that you’re entering the discussion from a well informed position. There certainly are variables and unforeseen circumstances that can arise during the course of an engagement, but having historical data from spend management tools to point to when structuring a new alternative fee arrangement can make both parties feel better about it from the outset.

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The Legal Operations Benchmarking report documents the findings of a survey of legal departments from around the world and of varying profiles. The report looks at similarities and differences across industries, legal expenditures, legal department sizes, and geographies, explores how certain trends are impacting other factors, and offers advice on how to solve legal operations challenges.